RexNutting,

WASHINGTON (CBS.MW) -- Microsoft shares jumped more than 4 percent Tuesday after a federal appeals court cleared the way for the software titan to sell its Windows 95 operating system and Internet Explorer Web browser together.

While Microsoft seems to have won the war of Windows 95, the next battle is already being fought over Windows 98, scheduled to be released to consumers this week.

The U.S. Appeals Court for the District of Columbia said U.S. District Judge Thomas Penfield Jackson errored "procedurally" and "substantively" in December when he granted the Justice Department's request for the injunction. The three-judge panel also permanently removed Harvard Law Professor Lawrence Lessig as a special master in the case. Click here for full text of opinion.

"The [Justice] Department may well regard further pursuit of the case as unpromising." U.S. Court of Appeals

"It's a great day for consumers," said Bob Herbold, chief operating officer of Microsoft.

Last October, the Justice Department charged Microsoft had violated a 1994 consent decree -- a pact between the government and the company that prohibited Microsoft from tying other products to Windows 95. Microsoft argued that the decree allowed Microsoft to market "integrated" products -- a category it insisted includes Windows 95 and the browser.

It's not over

The decision, while a strong victory for Microsoft, doesn't eliminate the company's legal problems by any means. In fact, the court explicitly endorsed some of the arguments and legal principles the government used in its latest case.

For instance, the court said Microsoft's installed base of computers that use its operating system (now estimated at 90 percent of all personal computers) "constituted an exceptional advantage and created exceptional risks of monopoly, because of two characteristics of the software industry -- increasing returns to scale and network externalities."

In a separate case, the Justice Department and 21 states sued Microsoft on May 18, charging the software giant with attempting to solidify its operating system monopoly by controlling the market for Internet browsing software. Click here for the full text of the lawsuit.

That case is based on alleged violations of the Sherman Antitrust Act, not a consent decree. The definition of "integrated product," so important in the appeals' court decision, won't matter in the Windows 98 case.

The latest suit won't delay the release of Windows 98 later this week. The trial in that case is scheduled for Sept. 8 -- also before Judge Jackson.

Microsoft General Counsel Bill Neukom said the appellate court's decision had provided "very important antitrust guidance on product innovation" that Microsoft would use in the Windows 98 case, particularly the line about "the undesirability of having courts oversee product design." But the court said its opinions about product innovation applied specifically to the consent decree, not to "antitrust law generally."

Improper procedure

The court of appeals ruled that Jackson had granted the injunction improperly by failing to give Microsoft an opportunity to argue against the injunction. Injunctions are typically granted only when one side can show that it will likely prevail on the merits of the case and can show that "irreparable harm" would result unless immediate relief is granted.

The court said Jackson heard no evidence on the potential harm before issuing the injunction.

Two of the three appellate court judges -- Judges A. Raymond Randolph and Stephen Williams -- went further, ruling that Microsoft probably hadn't violated the 1994 consent decree because Windows 95 and the browsing software are the kind of integrated product that is specifically allowed under the consent decree.

Unusual move

In its majority opinion, the court examined the merits of the case at considerable length, explaining this somewhat unusual move by saying "silence at this stage would risk considerable waste of litigative resources."

The decision could end the consent-decree case against Microsoft. As Windows 98 is rolled out, Windows 95 will begin to fade from the marketplace, particularly for new computers. The government will probably put its resources into the new case, rather than try to win a case the appeals court has already decided.

"The department may well regard further pursuit of the case as unpromising, especially given the alternate avenues developing in its recently launched separate attacks on Microsoft's practices," the court said.

Judge Patricia Wald dissented from the interpretation of the consent decree, arguing that the district court should hear evidence and decide that issue.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.